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VeriFone Systems Inc (PAY), eBay Inc (EBAY), Groupon Inc (GRPN): Is This Company Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does VeriFone Systems Inc (NYSE:PAY) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell VeriFone Systems Inc (NYSE:PAY)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at VeriFone Systems Inc (NYSE:PAY)’s key statistics:

PAY Total Return Price Chart

PAY Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 119.6% Pass
Improving profit margin (41.9%) Fail
Free cash flow growth > Net income growth (33.4%) vs. 123.9% Fail
Improving EPS 73.8% Pass
Stock growth (+15%) < EPS growth 17.8% vs. 73.8% Pass

Source: YCharts. *Period begins at end of Q1 2010 (January).

PAY Return on Equity Chart

PAY Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity (95.6%) Fail
Declining debt to equity (81.9%) Pass

Source: YCharts. *Period begins at end of Q1 2010 (January).

How we got here, and where we’re going
VeriFone Systems Inc (NYSE:PAY) falls short of a standout score because of weakness in its free cash flow and a far weaker return on equity — although that latter metric was at abnormally high levels during the start of our tracking period. Still, three years of consistent declines might be a warning sign. Can VeriFone Systems Inc (NYSE:PAY) increase its score from 4/7 the next time we examine it? Let’s dig a little deeper.

VeriFone Systems Inc (NYSE:PAY)’s latest earnings seemed to cheer investors, though (now former) CEO Douglas G. Bergeron said that results were below expectations, and it’s a bit hard to see why. Maybe the market expects VeriFone to improve now that Bergeron is out of the executive suite — the company cut its guidance for the first half of the year, so the new CEO had better bring a good long game. Previously, VeriFone has been squashed under lousy guidance and poor results because of (what else?) European weakness. This has happened twice in the last few months, so it may not be proper to expect much of a new CEO right now. No one man can restart Europe’s economic engine, after all, let alone the CEO of a smallish payment services company.

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